Tokyo, October 14, 2012
As prepared for delivery
Good afternoon. I would like to welcome you to our seminar. When I first looked at the list of panelists and keynote speakers, I realized that the title of today’s event is a bit of an understatement. This is not just a “high-level” seminar. It truly is a seminar at the highest level, given the caliber of our participants.
Of course, this event would not have been possible without the collaboration of the Bank of Japan. And I would like to thank Governor Shirakawa and his staff for their hard work and generous hospitality.
I will talk briefly about two things: (i) key financial stability risks and (ii) the role of global cooperation and governance.
I. Financial stability risks
The global economy may be fraught with uncertainty, but the underlying trend towards financial globalization is likely to continue. The alternative—financial de-globalization—is hard to imagine and difficult to achieve. It would be akin to persuading a billion people not to use Facebook. Connectedness—through trade, social media, and finance—simply is a fact of modern life.
So, the good news is that highly interconnected financial markets have the potential to allocate capital more efficiently across borders. The bad news is that we know it also raises the latent risks of financial instability and we have yet to fully understand these negative implications.
The crisis exposed the fragility of this tangled financial web, which connects markets, banks, sovereigns, corporates, and households.
You will be discussing financial stability risks in Session I. Let me highlight three.
• First, accommodative monetary policies in many advanced economies are likely to spur large and volatile capital flows to emerging economies. This could strain the capacity of these economies to absorb the potentially large flows and could lead to overheating, asset price bubbles, and the build-up of financial imbalances. We have been working on refining our institutional view on the liberalization and management of capital flows from the perspective of countries that receive and those that generate capital flows. Indeed, I have had useful discussions on these important issues with several policymakers this past week.
• Second, five years into the crisis, the financial system still worries me. There has been significant progress on regulatory reforms aimed at making markets and institutions more transparent, less complex, and less leveraged. But the job is not done yet. Many financial systems remain vulnerable, too complex, and overly reliant on a small number of large (and growing) institutions. Further efforts are needed to refine and implement these reforms. Worryingly, the collective energy to do just that is fading.
• Third, a growing number of government bonds are no longer considered “safe” or “risk-free.” We are all too well aware of the high debt legacy of the crisis and doubts about the creditworthiness of some governments. Safe haven flows into certain asset classes and markets could be a source of systemic financial risk.
II. Global cooperation and governance
So, how can we foster effective global cooperation and governance to address the challenges of increasing financial interconnectedness?
In the second half of our seminar, we will have an opportunity to examine the evolving international financial architecture. The close collaboration between the G20, the Financial Stability Board, and the IMF is a key part of this. We are working together to improve the monitoring and mitigation of systemic risk.
The question is: does the current framework ensure an appropriate balance between the global public good—that is financial stability—and the legitimate self-interest of sovereign states?
Right now, there are divergent views within and across countries on several important issues, including the management of capital flows. Disagreements may be unavoidable, but we must not forget that we all have a stake in global financial stability. It is important for us to stay at the table and work through these issues.
Another key aspect of the new financial architecture is the role of central banks. The crisis has prompted a fundamental reassessment of their macroeconomic and macro-prudential responsibilities. We have seen several bold initiatives by major central banks, including—most recently—the Bank of Japan’s expanded Asset Purchase Program, QE3 by the U.S. Federal Reserve, and the European Central Bank’s OMT bond-purchasing program. These are big policy actions in the right direction. Indeed, central bankers must play a significant role in pulling the global economy out of the current malaise but they cannot do it alone. Fiscal and structural policies must also pull their weight.
It remains unclear whether the expanded role of central banks is here to stay and the potential impact on their independence and credibility in the long run. Given the cross-border spillover effects of monetary policy decisions, central banks may need to step up their international dialogue and cooperation.
When I think of cooperation and determination, I often think of Japan—of the Japanese people who have demonstrated, time and again, a steely collective resolve in the face of natural disasters. The global financial crisis was a man-made disaster whose financial and human costs require that same steely, collective resolve across the globe—by authorities, financial institutions, multilateral organizations, and even the markets themselves.
Together, we will must repair, reboot and revamp the financial system. Together, we will create a safer financial system that is a source of stability, not fragility, and that can serve the economy to support growth and jobs.